CANADA 2020:
Progressive Policies -- Practical Solutions
NATIONAL INTEREST/PROVINCIAL JURISDICTION
FISCAL BALANCE TO THE RESCUE
by
Thomas J Courchene
School of Policy Studies, Queen’s
Senior Scholar, IRPP
tom.courchene@queensu.ca
Presentation for the Panel
Fiscal Means and Needs
Striking the Right Balance
Mont Tremblant – June 13-15-- 2006
OUTLINE
! Defining fiscal imbalance: horizontal and vertical;
! 21st century fiscal-balance challenge – issues in the
national interest but in provincial jurisdiction (NI/PJ);
! Quebec, NI/PJ, and vertical fiscal imbalance;
! The Martin and Harper approaches to NI/PJ;
! Equalization: the 2004 framework; The Expert Panel report;
An alternative proposal; Are we over-equalizing?
! Approaches to vertical fiscal balance;
! Cities and fiscal means and needs;
! Societal values and fiscal federalism;
! Conclusion
Defining Fiscal Balance: 1
VERTICAL FISCAL IMBALANCE (VFI):
! Most central governments of federal nations collect more in revenues
than is justified by their spending responsibilities
! One reason for this is that tax bases are increasingly mobile and are
therefore collected more efficiently higher up the jurisdictional
hierarchy. On the other hand, with the advent of the information era
many activities can now be devolved “closer to the people” as it were.
! This difference can be referred to as the fiscal gap
! This gap can be filled by: upward transfers of spending powers;
downward transfers of additional tax bases or tax shares; federal-
provincial transfers; and increasing existing taxes and decreasing
spending at the provincial level. All have been used in Canada.
! If, after this, there still exists a difference, there then can be said to be
a fiscal imbalance
! While I believe that there is a vertical fiscal imbalance, others do not.
! Complication: Has become a defining issue for federal political parties
Defining Fiscal Balance: 2
HORIZONTAL FISCAL IMBALANCE (HFI):
! The Constitution states that Ottawa is committed to “the principle of
making equalization payments to ensure that provincial governments
have sufficient revenues to provide reasonably comparable levels of
public services at reasonably comparable levels of taxation”
! Equalization system in disarray while soaring energy rents are
generating large interprovincial fiscal disparities
! Historically, these transfers played nation-building roles:
. In terms of vertical transfers, the conditional (shared-cost) grants of
the 50s and 60s allowed Canada to develop the provinces’ social
policy systems and to embed them within a national framework.
. Equalization originated when Canada decentralized its income tax
system (1957). The later further increases in tax decentralization that
made Canada one of the most decentralized federations, tax-wise,
would not have been possible without the eq’n program to spread
the fiscal benefit to the poorer provinces. Hence, eq’n is also in the
interests of Canada’s richer provinces
Other Roles for Fiscal Federalism:
! Flexible and efficient intergovernmental fiscal machinery
has played other key roles
! Provides much of the process dimension so that
Constitution can respond to external and domestic
challenges, e.g., we centralized during wartime and
decentralized later without altering the Constitution
! The magnitude of and incentives in the system of
intergovernmental transfers can alter the de facto division
of powers. Eg, unconditional transfers increase provincial
autonomy.
! Underpins the tax collection agreements—facilitates the
decentralized, yet harmonized, personal income tax
system, replete with provisions to ensure the fiscal union
! Equalization allows citizens no matter where they reside to
access comparable level of public services and is an
essential part of the societal glue that binds us together
If we are so creative, what is the problem?
! Machinery is falling into disrepair
" Thecurrent versions of Eq’n and CHT/CST maintain features dating
back over a quarter century. Need updating and revitalizing
! Recent policies have not helped
" The 2004 Equalization agreement undermined some key principles of
the program. The special deals with NL and NS left the program in
shambles
" The massive cuts to transfers in the 1995 budget undermined
provincial confidence. Led to the Vertical Fiscal Imbalance mantra on
the part of the provinces;
" Huge energy price increases dramatically increased interprovincial
fiscal disparities, which morphed the VFI into an HFI and set the
provinces against each other in a classic zero-sum fashion. Hence,
fiscal federalism is becoming divisive rather than cohesive.
! But there is another fascinating development that is
complicating all this—the emergence of issues that are in
the national interest but are also in provincial jurisdiction
National Interest / Provincial Jurisdiction: 1
! The new societal order is privileging knowledge and
human capital in much the same way as the Industrial
Revolution privileged physical capital
! From Lester Thurow:
capital is borrowable, raw materials are buyable and technology is
" If
copyable, what are you left with if you want to run a high wage
economy? – only skills, there isn’t anything else!
! Given that knowledge and human capital are critical to:
" Competitiveness and wealth creation
" Enhancing living standards
" Addressing cohesion and income distribution, it follows that
! Ottawa has to become involved in areas like PSE, early
child development, etc., and aspects of health because
they are in the national interest, even though they are
largely under provincial jurisdiction (henceforth NI/PJ)
National Interest / Provincial Jurisdiction: 2
! Cities (especially global city regions, GCRs) have become
the dynamic motors of the global and national economies:
" Theare the centres of dense concentrations of human capital, R&D,
high-value added services, which allows them to become national
nodes in the networks that drive growth, trade and innovation.
! From Simon Fraser’s Rick Harris:
" Canada’s future in terms of productivity, growth and living standards
will depend how well our GSRs will fare against US and international
GCRs
! Again, Ottawa has to become involved even though
Canada’s cities are creatures of the provinces. And again a
national-interest/provincial-jurisdiction (NI/PJ) dilemma
! As my title indicates, addressing this challenge is
inherently linked to fiscal balance and fiscal federalism.
! But something else is afoot – the new global order is also
influencing Quebec’s approach to the federation …
Quebec and the New Global Order
! My personal speculation is that Quebec too has realized
that the key to effective sovereignty in the information era
lies to a significant degree in the range of powers that are
under provincial jurisdiction
! It was only 15 years ago that the Quebec Liberal Party’s
Allaire Report requested a further 22 powers
! While a Quebec nationalist/federalist government would
not turn down additional powers, my sense is that there
has been an important shift away from demanding more
powers and toward demanding more revenues so that
Quebec can more effectively exercise its existing powers
! Hence Quebec’s insistence on redressing the Vertical
Fiscal Imbalance, and its role in creating the Council of the
Federation whose first priority was VFI.
! Prime Ministers Martin and Harper have taken almost polar
approaches to NI/PJ. …
Pursuing NI/PJ: The Paul Martin Approach
! Prime Minister Martin’s approach to NI/PJ (national interest / provincial
jurisdiction) can be stylized as follows
! Employing what might be termed the federal savings power the 1995
federal budget dramatically cut the CHST transfers, which served to
fiscally starve the provinces
! Because the provinces could not cut (indeed had to increase) health
spending, they drew funds from everywhere to transfer monies into
Medicare, creating problems across a wide range of policy areas.
! Martin then began to restore fiscal balance by using the federal
spending power to deal with these cash starved NI/PJ areas—human
capital (millennium scholarships. research chairs, early childhood
development, day care) and with cities (GST exemption, federal gas
tax, creation of a federal ministry), and of course health. I have labeled
this “hourglass federalism,” namely Ottawa’s end run around the
provinces to deal directly with cities and citizens, effectively leaving
the provinces as the squeezed middle of the division-of-powers
hourglass.
NI/PJ: The Paul Martin Approach; 2
! Indeed, child care, cities and health constituted three of the four
priorities in the Martin Liberals’ Throne Speech
! Many Canadians viewed this as an unrestrained exercise of the federal
spending power fueled by federal surpluses. The Economist likened
this to operating a “fiscal cafeteria”
! But at least as many welcomed these initiatives, especially those that
preferred more uniform programs across the provinces and therefore a
more active federal presence.
! This is clearly one way to redress the vertical fiscal imbalance and at
the same time to resolve the NI/PJ
! The message for present purposes is that this spending-power
federalism requires a specific approach to the intergovernmental fiscal
means and needs issue and to fiscal balance more generally
! But Harper’s return to a more classical federalism just as clearly
implies a much different approach to fiscal federalism
Pursuing NI/PJ: Harper’s Open Federalism
! Prime Minister Harper’s “open federalism” from his 2005
Quebec City campaign speech is a variant of classical
federalism:
"A respect for provincial jurisdiction, i.e., to the extent that he pursues
NI/PJ it will be to ensure that the provinces privilege these areas
" A recognition of a VFI that he has committed to redress via one or
more of tax-point transfers/shifts in tax fields/cash transfers
" This will reduce Ottawa’s fiscal ability to exercise the spending
power, which is consistent with Harper’s philosophy in any event.
" There is a quid pro quo here to go along with greater provincial
autonomy – perfecting the Canadian economic union, deepening the
tax collection agreements, forcing provincial sales taxes into GST
format, securing a national securities commission
" Harper is committed to working with the Council of the Federation to
improve the workings of the federation
" Harper appears committed to work with the provinces on PSE
(perhaps via addressing the VFI) and has promised infrastructure for
cities but not tax transfers
Martin vs Harper and Fiscal Federalism
! It is not my intention let alone my assigned role to delve
further into a Martin-Harper comparison on political
federalism.
! It is important to note however that their approaches imply
separate perceptions/realities relating to fiscal needs and
means, i.e., to the issues relating to fiscal balance in the
federation.
! This poses a dilemma. One operating principle might be to
seek out designs for intergovernmental fiscal architecture
that tend to maximize the flexibility to respond to all sorts
of challenges including philosophical swings. Yet it is
clear that approach taken to the NI/PJ relationship will
influence the nature of the fiscal arrangements.
! With this caveat, I now turn to horizontal balance and
equalization
Equalization I: The 2004 Framework
! Fixed amount of equialization--$10.9 billion for 2005-06,
escalated annually by 1.035, ie, by 3.5%
! Need to define fiscal capacity, e.g., NAS100 which is the
national average standard with 100% resource inclusion.
! Calculation procedure to allocate the fixed total
" Bring province with lowest fiscal capacity up to second lowest;
" Bring both of these up to third lowest;
" Continue until the fixed equalization pool is exhausted;
" Thus, the equalization benchmark is endogenous.
! Payments are unconditional and come from Ottawa.
! No province contributes directly to the program.
! Among the problems is that the level of equalization is
fixed and not influenced by actual interprovincial
disparities, such as energy related disparities
Equalization II: The Expert Panel Report
A: Structure
! The Panel makes a significant contribution with respect to
the machinery of equalization
! Revitalizes, modernizes and simplifies the mechanics
! Consolidates revenue categories from 33 to 5.
! Redefines problematic tax bases
" Residential property tax base is now based on market assessment
" Actual resource revenues will constitute the fiscal capacity for
resources revenues which will reduce the ability of provinces and
officials alike to “game” the system
! Will increase transparency and public understanding
! Payments to be made more predictable and less volatile
! Increased reporting requirements to public
! This was long overdue. Plaudits to the Panel!
Equalization II: The Expert Panel Report
B: Equalization Proposal
! Equalization will be principles-based and formula driven
! Formula will determine both total Eq’n and allocation
! Panel opts for NAS-50 (national average standard plus 50% inclusion
of resource revenue). Controversial because provinces tend to favour
either 100% or zero inclusion. Rational for less than 100% is the
principle that provinces that own resources should receive a fiscal
benefit from them. Zero inclusion would be way too generous to
resource provinces.
! The choice of 50% as the compromise, but I find it acceptable
! More controversial is their “cap”– provinces cannot receive
equalization if they have a fiscal capacity above that of any non-
receiving province. They assume that the definition of fiscal capacity
for the application of the cap will be NSAS-100. This makes the cap
confiscatory in terms of resource revenues over the relevant range.
This guaranteed a rocky reception from premiers of SK, NL, , etc
! I would have kept NAS-50 for the cap. The Panel may be flexible here
since this NAS-100 cap was an operating assumption, not a principle
Equalization II: The Expert Panel Report
B: Equalization Proposal, 2
! The Panel recommends that equalization should be the primary vehicle
for equalizing provincial disparities
! In the current environment, I disagree with this since, as their
(appended) graph shows, nine of the provinces are between $6,300 and
$6,900 per capita with Alberta soaring above all of them with a fiscal
capacity over $11,000. This seems unacceptable for several reasons:
" The attempt to apply a cap to SK and NL for a small overrun seems peculiar
if one leaves Alberta untouched
" It is not only the optics that are problematical. I can foresee some province
handing Medicare to Ottawa because it cannot even come close to
replicating the services provided by Alberta, and trying to do so leaves all its
activities cash-starved
" The situation where energy revenues drive up equalization and Ontario
residents have to pay 43% (its share of Ottawa’s revenues) of the increase
because Ottawa cannot tax provincial resource revenues is inequitable
! Nonetheless, there is no equalization proposal that would have
attracted unanimity in the current environment. The Panel is again to
be congratulated by offering a principled formula that faces the
challenges directly. It now forces detractors to come up with a
principled alternative. My attempt at an alternative follows…
An Alternative Horizontal Balance Proposal:
Integrating Equalization and the CHT/CST
! Eisenhower once said if you can’t solve a problem, enlarge
it. That is what my (admittedly controversial) proposal does
! In many other federations, addressing horizontal balance
involves some version of an equalization program as well
as other cash transfers (eg, Australia). I suggest a similar
approach for Canada.
! The first part of addressing HFI would be an eq’n program.
This would bring the poorer provinces up to some
acceptable standard. This program could draw heavily
from the proposal by the Expert Panel
! The second tier would involve the CHT/CST. For 2006-07
these transfers equal $932 per capita, except for Ontario
with $$846 and Alberta with $740. These smaller amounts
are the result of a limited clawback because these are high-
income provinces for the personal income tax. This
clawback needs to be i) expanded and ii) redesigned.
An Alternative Horizontal Balance Proposal:
Integrating Equalization and the CHT/CST: 2
! The clawback should be calculated in terms of NAS-100
plus equalization, it should be applied after equalization
! The entire transfer should be eligible for clawback
! Provinces with a per capita level of this augmented fiscal
capacity below, say, 110% of the national average would
get the full $932 per capita. Provinces with aggregate fiscal
capacity in excess of 110% would lose 20 cents of the
transfer for every dollar that their income exceeds the
110% threshold, ie, the tax-back rate is 20%
! If Alberta were to receive zero CHT/CST monies, this would
be because its fiscal capacity above the 110% threshold is
at least $4,660 per capita, -- five times the $932 value of the
transfer.
! The federal savings would be redeployed in equalization or
for redressing VFI.
An Alternative Horizontal Balance Proposal:
Integrating Equalization and the CHT/CST: 3
! There is room to alter the parameters, such as the clawback rate, the
threshold and the amount of the transfer subject to clawback.
! The two parts could be coordinated too. For example, if the
equalization program were to be NAS 0% (no inclusion of resource
revenues), then the clawback on the $932 should be something more
like 50%, for the same reasons that the Expert Panel wanted a cap
! While Ottawa cannot access Alberta’s resource revenues directly, it
certainly can access them indirectly via this clawback on aggregate
fiscal capacity. This is similar to what happens now under the CHT/CST
! Thus, this is a negative income tax for poor provinces and a positive
income tax for the rich provinces. We do this for citizens, why not for
provinces?
! There is a problem however. These transfers include funds agreed
upon in the 2004 health accord. This may make it unacceptable.
! Because concerns about equalization appear to be shifting toward the
position that we are “over-equalizing,” it is important to devote some
attention to this issue….
Over-Equalization:
Some Unpleasant Fiscal Arithmetic
! Row 1 of the appended Table 1 contains Finance Canada 2005-06 data
for per capita NAS100 fiscal capacity. Ontario ranks third.
! Row 2 then adds actual equalization and row 3 adds the CHT/CST
transfers for 2005-06, detailed earlier.
! Row 4 is the sum of rows 1-3. Now Ontario does rank fifth. With current
energy prices incorporated in the data, the fortunes of the top four
provinces would much improve, while an equalization program would
bring the 5 recipient provinces up. Ontario would remain unchanged.
! Row 5 presents the consolidated provincial and local revenues by
province for fiscal year 2004-05. These data are more inclusive than the
data that go into row 4. Another big difference is that the row 5 data are
actual revenues, not calculated revenues based on fiscal capacity.
! The results are quite revealing. Ontario ends up last. Perhaps this is
not that surprising since the province spends less per capita than
many other province in many expenditure areas.
! The real surprise is Alberta, which ends up in second place behind
Saskatchewan. The explanation for Alberta is two-fold. First, it would
probably be much higher in relation to the provinces were more recent
data incorporating higher energy prices used.
Over-Equalization:
Some Unpleasant Fiscal Arithmetic 2
! Second, Alberta has the lowest tax rates of all the provinces. But if
Alberta does not tax an area (eg, it has no PST) and passes the savings
on to its citizens, the eq’n formula assigns a national average tax rate
to Alberta’s retail sales in calculating its fiscal capacity. If Quebec or
Manitoba were to maintain low electricity prices and thus pass on the
savings to their citizens, there is agreement that these potential rents
should augment their fiscal capacity. But this tends not to be done,
perhaps for measurement reasons. Yet this serves to increase
measured fiscal capacity disparities.
! The other approach to the over-equalization issue in Table 1 relates to
the observation that the Constitution does not mention revenues per
capita, but rather “reasonably comparable levels of public services.”
But because wages and other costs of providing public services vary
across provinces, the same level of per capita revenues will provide
different levels of these services in different provinces.
! Row 6 of Table 1 presents an index of average hourly wages across
provinces and row 7 corrects the row 4 measures of aggregate fiscal
capacity to reflect these wage costs. This is a rough and ready
approach, one that clearly needs more detailed research. But the
results are what one would expect: interprovincial disparities are
reduced. Ontario comes out as the province that is able to supply the
fewest bundles of public services
Over-Equalization:
Some Unpleasant Fiscal Arithmetic 3
! It may be the case that Ontario is the province that needs the least
number of these bundles. At the very least one needs to explore this
before accepting row 7 and 8 as evidence of over-equalization
! One might usefully recall, however, that Equalization began when trade
flowed east-west (with Ontario as the privileged north-south conduit)
and when our economy operated behind high tariff walls. None of this
exists in 2006. We must maintain our east-west equity concerns, even
more so in this knowledge era where we must strive to ensure that all
Canadians have equality of opportunity on the human capital front. But
we also have to keep an eye on our north-south competitive ability
! And It is important to note that Ontario’s concern is every bit as much
about fairness in the funding of equalization as it is about its size. The
earlier equalization-CHT/CST proposal addresses this funding issue.
! Nonetheless perspective is needed. As UPEI political scientist David
Milne once noted: Intergovernmental fiscal arrangements as practice
and principle are deeply embedded in the “political logic” or “political
fit” of the times.
Vertical Fiscal Balance: “Uploading”
! Intriguingly, at the 2004 meeting of the Council of the Federation the
provinces proposed that Ottawa should take over the responsibility for
Pharmacare
! Ottawa said no to the offer, perhaps because it had no intention of
saddling itself with an open-ended spending mandate. Such
undertakings properly belong to the provinces!!
! But it may have been a good fit, since Ottawa controls the testing and
approving of drugs as well as the laws relating to when generic drugs
can come on stream.
! This example is instructive because “rationalizing” the division of
powers seems more likely in the current time frame than in previous
times.
! In effect, this is what the national-interest/provincial-jurisdiction issue
is fundamentally about, namely allowing the creative exercise of fiscal
federalism to accommodate this NI/PJ within the existing division of
powers or (less likely but still possible) altering the division of powers
to reconcile NI/PJ.
Vertical Fiscal Balance: GST Transfers
! The most likely candidate for a further tax transfer to the
provinces is one or more points of the GST, especially if
and when the PST/GST harmonization occurs.
! This was the recommendation of Quebec’s commission on
fiscal imbalance. It is also the recommendation of the
CCCE, and many economists would also be on side.
! The GST would seem to be the preferred tax because
consumption is more evenly distributed across provinces
than income (personal and corporate) and differences in
cross-province GST rates are preferable to comparable
differences in PIT and especially CIT rates.
! Such a GST tax transfer could represent new funds such
as those proposed for PSE, or it could be used to replace
existing cash transfers for health, etc., or less likely it
could be exchanged for control of some of the existing
provincial shares of the income taxes, especially CIT.
Vertical Fiscal Balance: GST Transfers, continued
! There is an intermediate approach to a new tax transfer,
namely that Ottawa could transfer the proceeds, not the tax
base itself to the provinces. The proceeds could be
allocated on an equal per capita base, for example.
! This would provide much less revenue autonomy to the
provinces since they would not be able to alter the tax rate,
and unless these proceeds were completely guaranteed
(as in Australia) the provinces might still have to worry
about Ottawa repeating its freezing, capping and cutting
exercises in respect of the CHST. It is much more difficult
to take back a transfer of a tax base.
! Presumably this is why there is a quid quo pro associated
with the Conservatives’ commitment to address VFI, since
Ottawa might lose some leverage over the provinces. But
the quid quo pro is important for efficiency and
competitiveness in any event.
Cities and Fiscal Balance
! Canadian cities, (especially the CHRs) are more transfer dependant on
their provinces relative to other cities in federal nations. Frankfurt, in
federal Germany, has access to 15% of the personal income tax (half
from the centre and half from the states). And unitary state Stockholm,
with 35% of its revenues coming from the PIT, has double the spending
of Frankfurt.
! Given the massive lobbying effort that the provinces have mounted for
increasing their share of Ottawa’s revenues, it is strange that the
provinces keep the cities on such a tight fiscal leash.
! Cities own-source revenues come mostly from property taxes, when
they really need access to a broad-based revenue source like the PIT
or sales taxes (PST/GST).
! To be sure, the cities could and should follow the route of US cities to
rely more on user fees and/or to set up businesses for their various
utilities
! The related concern of the GCRs is that other levels of government
view them is ideal places to redistribute from. What the cities want is
the ability to retain more of the revenues that are generated within their
boundaries.
Cities and Fiscal Balance: 2
! While the larger cities obviously welcome the federal initiatives like the
gas tax, they view the equal-per-capita allocation as an equalization
program—they lose out because their per-capita shares of generating
these revenues are larger than in the average municipality.
! Note that this is a version of the earlier over-equalization argument.
Public services per unit cost much more in GCRs than in smaller cities
and arguably their needs are higher too, given the challenges of
settling immigrants, of homelessness, and the fact that EI typically
discriminates against GCRs
! The provinces have much greater flexibility in privileging their GCRs
on the revenue side than does Ottawa.
! Therefore, unless there are changes in the constitutional position of
cities (which may make sense since it is cities/municipalities and not
the provinces that actually deliver many federal services), it is the
provinces that should be pressed to provide greater access to broad-
based revenue or the proceeds therefrom.
! GCRs might bring pressure on their provinces by reminding them that
federations like Germany have “city provinces” (Berlin, Hamburg,
Bremen), which would address their needs if their provinces don’t.
Cities and Fiscal Balance: 3
! Where Ottawa may have a larger role is in terms infrastructure funds.
Just as Ottawa runs regional development programs, one can imagine
mass transit programs for example that may respond to cities’ needs,
especially since US cities can access Washington’s infrastructure
funds.
! In the coming years, the emphasis on subsidiarity and the decreasing
costs of information and coordination, will likely mean that more
powers will devolve to cities.
! Thus, decentralization will no longer be associated with transferring
powers from Ottawa to the provinces. Increasingly, it will mean
transferring money and powers from both of these governmental
levels to our cities.
! It is a primarily a question of how, not if, our cities will become more
formally and more fully integrated into Canadian fiscal and political
federalism .
! This is quintessentially a NI/PJ issue. If it is not resolved via the fiscal
federalism route, then pressures will be directed to altering the cities
jurisdictional status. Exciting times ahead.
Societal Values and Federalism: I
! Proposition: The evolution of federations (including the effective
division of powers and the nature of intergovernmental transfers) is
not independent of the underlying social and political values of the
society
! To see this consider four developed federations
! AUSTRALIA:
! Australia is a highly centralized federation and it is a highly egalitarian
society: Welfare is centralized with uniform levels across states;
National wage grids apply in many sectors; The states are very
transfer-dependent, etc. In this environment it should not be surprising
that Australia has the most comprehensive and egalitarian equalization
system among developed federations.
! Thus the workings of the Australian federation mesh extremely well
with the underlying homogeneity and the egalitarian nature its society.
Societal Values and Federalism: II
! GERMANY
! Germany is also centralized and egalitarian but with quite different
institutions than those in Australia. Most laws including the tax rates
for major revenues sources are legislated by the center but
implemented by the Laender.
! Their Basic Law (constitution) calls for “uniformity of living
conditions” which is carried out in part by a generous equalization
program including an inter-Laender revenue sharing pool. As an
interesting aside, in the wake of the challenges associated with the
integration of the east, the richer Laender are challenging the
equalization system on grounds that it over-equalizes
! Nonetheless, the operations of German fiscal federalism mesh well
with the collective nature of German society: The second most
egalitarian modern federation has the second most egalitarian set of
fiscal arrangements
Societal Values and Federalism: III
! CANADA
! The Canadian Constitution embodies a list of exclusive provincial
powers which, among other features, assigns to the provinces many
of the areas that serve to define us. Beyond this there is substantial
decentralization on both the tax and expenditure fronts. Virtually all
transfers are unconditional. Equalization is much less
comprehensive than in either Germany and Australia. Opting out has
been a common feature of the federation
! But this coincides with a society that is linguistically, legally and
culturally diverse, even apart from the First Nations. Arguably
Canada’s decentralization also reflects the fact that the central
provinces (Quebec and Ontario) still have about 60% of the
population on the one hand and that Alberta is virtually fiscally
independent of the center by virtue of its oil wealth
Societal Values and Federalism: IIII
! UNITED STATES
! The rugged individualism or free enterprise nature of American society
is reflected in the laissez-faire US constitutional rhetoric “Life, Liberty
and the Pursuit of Happiness.” Income distribution at any point in time
is not a major feature of US society. Therefore, it is not surprising that
this should also apply to the states. Indeed, alone among modern
federations the US does not have a formula-based equalization
program.
! SUMMARY
! Intergovernmental transfer arrangements and the
allocation of fiscal needs and means are anything but
arbitrary. They complement the existing tax and
expenditure allocation in a manner that integrates overall
fiscal federalism in directions consistent with the implicit
or explicit values and norms of the respective federal
systems and societies.
! Thus we need made-in-Canada models
CONCLUSION
In my book A State of Minds: Toward a Human Capital Future
for Canadians (IRPP,2001) I propose the following Mission
Statement for 21st century Canada:
Design a sustainable, socially inclusive and
internationally competitive infrastructure that
ensures equal opportunity for all Canadians
to develop, to enhance and to employ in Canada
their skills and human capital thereby enabling
them to become full citizens in the
information-era Canadian and global societies
Included as a component of the Mission Statement would be
a bill of human capital rights for our children (similar to
Tom Kent’s Youth Charter)
I respectfully submit that that this would qualify as a
“Progressive Value” in the Canada 2020 context.
CONCLUSION continued
! The implementation challenge is to embed this (or any
other chosen goal) within the constitutional, social, cultural
and moral values that define Canada and Canadians
! This means striking acceptable balances across a broad
range of fronts – between equity and efficiency, markets
and governments, uniformity and diversity, centralization
and decentralization, and of course federal and provincial.
! The cohesive process dimension that will make this
operational is striking the right balance between fiscal
means and needs, both intergovernmentally and between
governments and citizens.
! We have been there before. It is time to draw on our
demonstrated mastery of the art of federalism
! If there is a societal will, there certainly is a Canadian way
References